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Chapter 13. Statement of Cash Flows. Objectives of this Chapter. I. Identify business activities which can generate or use cash. 2.Differentiate income flows from cash flows of operating activities. 3. Introduce the content and the usefulness of the statement of cash flows.

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chapter 13

Chapter 13

Statement of Cash Flows

objectives of this chapter
Objectives of this Chapter
  • I. Identify business activities which can generate or use cash.
  • 2.Differentiate income flows from cash flows of operating activities.
  • 3. Introduce the content and the usefulness of the statement of cash flows.
  • 4. Learn how to prepare the statement of cash flows.

Statement of Cash Flows

1 activities which can either generate cash or use cash for a business entity
1. Activities which can either generate cash or use cash for a business entity
  • A. Operating activities.
  • B. Investing activities.
  • C. Financing activities.

Statement of Cash Flows

i activities which can either generate cash or use cash for a business entity
I. Activities which can either generate cash or use cash for a business entity
  • Operating activities:
  • Cash Inflows:
    • 1. Collections from customers including cash received from sales (or services) and collections of A/R.
    • 2. Cash receipts of interests or dividends.
    • 3. Collections of other operating receipts (i.e., unearned revenue, rent revenue).

Statement of Cash Flows

cash flows from operating activities contd
Cash Flows from Operating Activities (contd.)
  • Cash Outflows:
    • 1. Payments to suppliers.
    • 2. Payments to employees.
    • 3. Payments for interest expense.
    • 4. Payments for income taxes.
    • 5. Payments for other expenses(i.e., Prepaid expenses; rent expenses).

Statement of Cash Flows

activities which can either generate cash or use cash for a business entity
Activities which can either generate cash or use cash for a business entity
  • A. Operating activities.
  • B. Investing activities.
  • C. Financing activities.

Statement of Cash Flows

cash flows from investing activities
Cash Flows from Investing Activities
  • Transactions involving acquiring (Investing (Cash outflows)) and selling (Disinvesting (Cash inflows)):
    • a. Property, Plant and Equipment.
    • b. Investments (current and non-current).
    • c. Notes Receivable (current and non-current).

Statement of Cash Flows

notes receivable
Notes Receivable
  • Notes Receivable (current and non-current), including:
    • Lending money (N/R , cash outflow);
    • Collecting of loan (N/R , cash inflow);
    • Selling of N/R (N/R, discounting N/R, cash inflow)

Statement of Cash Flows

activities which can either generate cash or use cash for a business entity9
Activities which can either generate cash or use cash for a business entity
  • A. Operating activities.
  • B. Investing activities.
  • C. Financing activities.

Statement of Cash Flows

cash flows from financing activities
Cash Flows from Financing Activities
  • Obtaining resources from owners and creditors (cash inflows) and repaying the amount borrowed (cash outflows).
  • Cash inflows:
    • Cash received from issuance of common stock.
    • Cash received from issuance of bonds.
    • Cash received from issuance of N/P (short-term or long term).

Statement of Cash Flows

cash flows from financing activities contd
Cash Flows from Financing Activities (contd.)
  • Cash Outflows:
    • Retirement of bonds.
    • Retirement of stock.
    • Payments of N/P.
    • Payments of dividends.

Statement of Cash Flows

2 differentiate income flows from cash flows of operating activities
2. Differentiate income flows from cash flows of operating activities
  • The operating activities are also reported in the income statement (I/S).
  • Differences between operating activities reported in I/S and cash flow statement:
    • I/S is prepared on an accrual basis.
    • Statement of cash flows is prepared on a cash basis.
  • Therefore, net income ǂ cash flows from operating activities in most cases.

Statement of Cash Flows

operating activities contd
Operating Activities (contd.)
  • Two approaches can be used to reconcile net income to net cash flows of operating activities:
    • 1. Indirect Method
    • ==> Lump-Sum Adjustment
    • 2. Direct Method
    • ==> Individual Account Adjustment

Statement of Cash Flows

reconciliation indirect method
Reconciliation: Indirect Method
  • Adjust net income for all differences between income flows (on an accrual basis) and cash flows (on a cash basis).

Statement of Cash Flows

reconciliation direct method
Reconciliation: Direct Method
  • Adjust each revenue account on I/S to cash collection and adjust each expense account to cash payment.
  • Subtract total cash payments from total cash collections to derive net cash flows of the operation activities.

Statement of Cash Flows

3 the content and the usefulness of the statement of cash flows
3. The Content and the Usefulness of the Statement of Cash Flows
  • In order to show cash flows of a company, cash flows of all three types activities occurred during the reporting period should be reported in one statement.
  • SFAS No. 95, “Statement of Cash Flows,” requires companies present the statement of cash flows using a specific format.

Statement of Cash Flows

sfas no 95
SFAS No. 95
  • Following SFAS No. 95, the statement of cash flows should have three sections:
    • 1. Cash flows from operating activities.
    • 2. Cash flows from investing activities.
    • 3. Cash flows from financing activities.
  • See p33-35 and 41-43 for examples of Statement of Cash Flows.

Statement of Cash Flows

the usefulness of the statement of cash flows
The Usefulness of the Statement of Cash Flows
  • The following questions can be answered from the cash flow statement:
  • 1. What is the relationship between net income and cash provided by operations?
  • 2. Why did cash decreased when net income increased?
  • 3. What expansion (investment) activities took place and how were they financed?

Statement of Cash Flows

the content and the usefulness of the statement of cash flows contd
The Content and the Usefulness of the Statement of Cash Flows (contd.)
  • 4. How much is the cash provided by operating activities?
  • 5. What happened to the proceeds received from issuance of bonds or common stock?

Statement of Cash Flows

4 procedures for preparation of the statement of cash flows
4. Procedures for Preparation of the Statement of Cash Flows
  • 1. Operating Cash Flows (indirect method).
  • 2. Investing Cash Flows.
  • 3. Financing Cash Flows.

Statement of Cash Flows

4 1 operating cash flows indirect method reconciliation method
4.1 Operating Cash Flows (Indirect Method; Reconciliation Method)
  • Net Income
    •  Adjustments
    • + Any increase in current Liabilities (except for N/P)
    • + Any decrease in current assets (except for cash and N/R)
    • - Any decrease in current liabilities (except for N/P)
    • - Any increase in current assets (except for cash and N/R)

Statement of Cash Flows

adjustments to convert net income to net cash flow from operating activities

Net Income

Adjustments

Adjustments to Convert Net Income to Net Cash Flow from Operating Activities
  • + Depreciation expense, Bad Debt expense
  • + Loss on disposal of assets or liabilities
  • - Gain on disposal of assets or liabilities

Statement of Cash Flows

4 2 investing cash flows
4.2 Investing Cash Flows
  • Inflows: decrease in noncurrent assets (i.e., long-term investments, P.P.E.) and certain current assets (i.e., trading securities, N/R).
  • Outflows: increases in noncurrent assets and certain current assets

Statement of Cash Flows

4 3 financing cash flows
4.3 Financing Cash Flows
  • Inflows: increases in noncurrent liabilities (i.e., B/P, N/P), stockholders’ equity and certain current liability (i.e., N/P).
  • Outflows: decreases in noncurrent liabilities, stockholders’ equity, certain current liability and dividend payment.

Statement of Cash Flows

adjustments loss on disposal of assets or liability
Adjustments:+ Loss on Disposal of Assets or Liability
  • Example: Sale a piece of land with a cost of $9,000 for $7,000
    • Cash 7,000
    • Loss on Sale of Landa 2,000
    • Land 9,000
    • a. This transaction results in a cash increase of $7,000.

Statement of Cash Flows

data needed to prepare statement of cash flows
Data needed to prepare statement of cash flows
  • 1. Comparative balance sheet statements.
  • 2. The income statement.
  • 3. The retained earnings statement.
  • 4. Other supplemental information concerning the reasons for the changes in the B/S accounts (other than cash).

Statement of Cash Flows

example 1 layton company balance sheet 12 31 x2
Example 1Layton Company Balance Sheet (12/31/x2)
  • a. Land was sold at cost for cash during the year.
  • b. A building was purchased for cash during the year and no building or equipment was sold during the year.

Statement of Cash Flows

example 1 contd layton company balance sheet 12 31 x2
Example 1 (contd.)Layton Company Balance Sheet (12/31/x2)
  • a. Bonds were issued at the end of year.

Statement of Cash Flows

layton company statement of cash flows for the year ended december 31 20x2
Layton CompanyStatement of Cash Flows For the Year Ended December 31, 20x2
  • Net cash flow from operating activities:
  • Net Income $7,000
  • Adjustments to reconcile net
  • income to net cash provided by
  • operating activities:
  • Add: Depreciation expense 2,300
  • Increase in A/P 1,500
  • Less: Increase in A/R (2,700)
  • Net cash provided by
  • operating activities $8,100

Statement of Cash Flows

layton company statement of cash flows contd
Layton CompanyStatement of Cash Flows (contd.)
  • Cash flows from investing activities:
    • Proceeds from sale of land $3,000
    • Payments for
    • purchase of building (12,000)
    • Net cash used
    • by investing activities (9,000)
    • Cash flows from financing activities:
    • Proceeds from issuance of bonds 7,000
    • Payments of dividends (3,500)
    • Net cash provided by
    • financing activities 3,500

Statement of Cash Flows

layton company statement of cash flows contd35
Layton CompanyStatement of Cash Flows (contd.)
  • Net increase in cash $2,600
  • Cash, Jan 1, 19x2 $4,000
  • Cash, Dec 31, 19x2 $6,600

Statement of Cash Flows

example 2 green company balance sheet
Example 2:Green Company Balance Sheet
  • Accounts 1/1/x2 12/31/x2 Difference
  • Cash $3,500 $5,500
  • A/R 4,400 3,600 800 
  • Inventory 5,000 6,600 1,600 
  • Land 8,200 12,200 4,000c 
  • Building & Equip 35,700 48,700 13,000a,d
  • Acc. Depr. (6,000) (8,700)
  • Total Assets $50,800$67,900

Statement of Cash Flows

green company balance sheet contd
Green Company Balance Sheet (contd.)
  • A/P $5,100 $3,200 1,900 
  • Salary Payable 1,400 1,800 400 
  • B/P, 10% 7,000 15,000 8,000b 
  • Common Stock, $10 par 8,000 9,000 1,000
  • Paid-in Capital 16,000 19,000 3,000 
  • R/E 13,300 19,900
  • Total Liabilities
  • & Equity $50,800$67,900

Statement of Cash Flows

slide38

Income Statement

For the Year Ended 12/31/20x2

Sales Revenue $80,000

CGS (48,600)

Gross Profit $31,400

Operating Expenses:

Deprecation Expense $3,400

Other Expenses 15,900 (19,300)

$12,100

Other Revenues & Expenses

Gains on Sale of Equipment $600

Interest Expense (700) (100)

Income Before Income Tax $12,000

Income Tax Expense (3,600)

Net Income $8,400 .

Statement of Cash Flows

38

retained earnings 20x2
Retained Earnings (20x2)
  • Beginning balance
  • of retained earnings $13,300
  • Add: Net Income 8,400
  • 21,700
  • Less: Dividends (1,800)
  • Ending balance
  • of retained earning $19,900

Statement of Cash Flows

supplemental information for 20x2
Supplemental Information for 20x2
  • (a) Equipment was purchased for cash at a cost of $15,200.
  • (b) Ten-year bonds payable with a face value of $8,000 were issued for $8,000 at the end of the year.
  • (c) Land was acquired through the issuance of 100 shares of $10 par common stock when the stock was selling at a market price of $40 per share.
  • (d) Equipment with a cost of $2,200 and a book value of $1,500 was sold for $2,100 cash.

Statement of Cash Flows

green company statement of cash flows for the year ended december 31 20x2
GREEN CompanyStatement of Cash Flows For the Year Ended December 31, 20x2
  • Net cash flows from operating activities:
  • Net Income $8,400
  • Adj. To reconcile net income to net
  • cash provided by operating activities:
  • Add: Depreciation Expense 3,400
  • Decrease in A/R 800
  • Increase in S/P 400
  • Less: Increase in Inventory (1,600)
  • Decrease in A/P (1,900)
  • Gain on sale of Equipment (600)
  • Net cash provided by operating activities $8,900

Statement of Cash Flows

slide42

GREEN Company

Statement of Cash Flows (contd.)

Cash flows from investing activities:

Payments for purchase of equip. (15,200)

Proceeds from sale of equipment 2,100

Net cash used by investing activities (13,100)

Cash flows from financing activities:

Proceeds from issuance of bonds 8,000

Payments of dividends (1,800)

Net cash provided by financing activities 6,200

Net increase in cash (see Schedule 1) $2,000

Cash, Jan 1, 19x2 $3,500

Cash, Dec 31, 19x2 $5,500

42

Statement of Cash Flows

slide43

GREEN Company

Statement of Cash Flows (contd.)

Schedule 1: Investing & financing activities not affecting cash flows:

Investing activities:

Acquisition of land by Issuance of

common stock ($4,000)

Financing Activities:

Issuance of common stock for land $4,000

43

Statement of Cash Flows

direct exchange
Direct Exchange
  • Direct exchange: An example of a direct exchange is issuing bonds to acquire a building. This transaction should appear in the schedule of the cash flow statement as an investing activity (i.e., acquisition of building) and as a financing activity (i.e., issue bonds for building).

Statement of Cash Flows

partial cash investing and financing activities
Partial Cash Investing and Financing Activities
  • Example: acquiring land costing $10,000 by paying $1,000 down and signing a $9,000 notes payable.

Statement of Cash Flows

partial cash investing and financing activities contd
Partial Cash Investing and Financing Activities (contd.)
  • Presentation on Cash Flow Statement for Partial Investing & Financing Activities:
    • Cash Flows from Investing Activities:
    • Purchase of land by issuance
    • of note and cash ($10,000)
    • Less: issuance of note 9,000
    • Cash payment
    • for purchase of land ($1,000)

Statement of Cash Flows

cash flows from the operating activities
Cash Flows from the Operating Activities
  • Activities can be presented using:
    • a. Indirect Method (as used in examples 1,2):
    • N/I  Adjustments to reconcile net income to cash flows.
    • b. Direct Method: The operating cash outflows are deducted from the operating cash inflows to determine the net cash provided by (or used in) operating activities.

Statement of Cash Flows

cash flows from the operating activities contd
Cash Flows from the Operating Activities(contd.)
  • SFAS No. 95 allows the use of both methods, but encourages the use of the direct method.
  • However, if the direct method is used, a reconciliation of net income and cash flows from operating activities using the indirect method must be provided in the supplementary statement.

Statement of Cash Flows

using the direct method in preparing the operating cash flows
Using The Direct Method in Preparing The Operating Cash Flows
  • Cash inflows from operating activities:
    • 1. Collections from customers.
    • 2. Interest & dividends collected.
    • 3. Other operating receipts.

Statement of Cash Flows

using the direct method in preparing the operating cash flows contd
Using The Direct Method in Preparing The Operating Cash Flows (contd.)
  • Cash outflows from operating activities:
    • 1. Payments to suppliers.
    • 2. Payments to employees.
    • 3. Payments of interest.
    • 4. Other operating payments.
    • 5. Payments of income taxes.

Statement of Cash Flows

adjustments to convert i s amount to operating cash flows a direct approach
Adjustments to Convert I/S Amount to Operating Cash Flows -- A Direct Approach
  • I/S Cash Flows from
    • Amounts AdjustmentsOperating ActivitiesNet
    • Collections
    • Sales +Dec. in A/R; or = from
    • Revenue -Inc. in A/R Customers
    • Cash
    • +Dec. in Int. Rec.; Inflows
    • -Inc. in Int. Rec. from
    • Operating
    • Interest Interest Activities

Statement of Cash Flows

adjustments to convert i s amount to operating cash flows contd
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
  • I/S Cash Flows from
    • Amounts Adjustments Operating Activities Net
    • Dividend +Dec. in Dividend Rec. = Dividend
    • Revenue -Inc. in Dividend Rec. Collected
    • Cash
    • +Inc. in Unearned Rev.; Inflows
    • or from
    • Other -Dec. in Unearned Rev. Operating
    • Other Activities
    • Revenue = Operating
    • Receipts
    • +Dec. (-Inc.) in Other
    • Receivable Accounts
    • * Ignore gain from sale of PPE because it does not have any cash inflows.
    • 52

Statement of Cash Flows

adjustments to convert i s amount to operating cash flows contd53
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
  • I/S Cash Flows from
    • Amounts Adjustments Operating Activities Net
    • +Inc. in Inventory;
    • Cost of or Payments
    • Goods -Dec. in Inventory = to
    • Sold +Dec. in A/P; or Suppliers Cash
    • -Inc. in A/P Outflows
    • from
    • Salary +Dec. in Sal. Payable; Payments Operating
    • or = to Activities
    • Expense -Inc. in Sal. Payable Employees
    • 53

Statement of Cash Flows

adjustments to convert i s amount to operating cash flows contd54
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
  • I/S Cash Flows from
    • Amounts Adjustments Operating Activities Net
    • +Dec. in Int. Payable
    • Interest -Inc. in Int. Payable = Payments
    • Expense of Interest
    • Cash
    • Outflows
    • from
    • +Inc. in Prepaids Operating
    • -Dec. in Prepaids Activities
    • Other Other
    • = Operating
    • Expense Payments
    • +Dec. (-Inc.) in Other
    • Payable Accounts
    • 54

Statement of Cash Flows

adjustments to convert i s amount to operating cash flows contd55
Adjustments to Convert I/S Amount to Operating Cash Flows (contd.)
  • I/S Cash Flows from
    • Amounts Adjustments Operating Activities Net
    • +Dec. in I/T Payable;
    • or
    • Income -Inc. in I/T Payable Payments Cash
    • Tax = of Income Outflows
    • Expense Tax from
    • Operating
    • Activities
    • Note: Ignore Bad Debt Expense, depreciation expense and loss from sale of PPE since those accounts do not have any cash outflows,
    • 55

Statement of Cash Flows

layton company statement of cash flows
Layton CompanyStatement of Cash Flows
  • (Using the direct method in preparing the operating activities section of a cash flow statement for Example 1)
  • Cash flows from Operating Activities:
    • Cash inflows:
    • Collections from customers $29,100 1
    • Cash inflows from
    • operating activities $29,100
    • 1. 31,800 -2,700 = 29,100

Statement of Cash Flows

layton company statement of cash flows contd57
Layton CompanyStatement of Cash Flows (contd.)
  • Cash outflows:
    • Payments of interest (1,400)
    • Other operating payments (16,600) 2
    • Payments of income tax (3,000)
    • Cash outflows
    • from operating activities (21,000)
    • Net Cash inflows from Operating $8,100
    • Activities
    • 18,100 - 1,500 = 16,600
    • * A reconciliation of net income and cash flows using indirect method must also be presented.

Statement of Cash Flows

green company statement of cash flows
Green CompanyStatement of Cash Flows
  • (Using the direct method in preparing the operating activities section of a cash flow statement of Example 2.)
  • Cash flows from Operating Activities:
    • Cash inflows:
    • Collections from customers $80,800 1
    • Cash inflows from
    • operating activities $80,800
    • 1. 80,000 + 800 = 80,800.

Statement of Cash Flows

green company statement of cash flows contd
Green CompanyStatement of Cash Flows (contd.)
  • Cash outflows:
    • Payments to suppliers $(52,100) 1
    • Payments of interest (700)
    • Other operating payments (15,500) 2
    • Payments of income tax (3,600)
    • Cash outflows
    • from operating activities (71,900)
    • Net Cash Flows from Operating $8,900
    • Activities
    • 1. 48,600 + 1600 + 1900 = 52,100.
    • 2. 15,900 - 400 = 15,500.

Statement of Cash Flows

green company statement of cash flows contd60
Green CompanyStatement of Cash Flows (contd.)
  • Net cash inflow
    • from operating activities $8,900
    • Cash flows from investing activities
    • :
    • :
    • Cash flows from Financing Activities
    • :
    • :
    • * A reconciliation of net income and cash flows using indirect method must also be presented.

Statement of Cash Flows